Bankwest pushes beyond lending

Bankwest is now posting good profit growth as it moves out of its three year turnaround with a new strategy due in September, but it still faces some tough balancing acts to chart sustainable growth.

Bank of Western Australia senior management has been briefing analysts independently from its owner, Commonwealth Bank of Australia, as it moves out of its three-year turnaround with a new strategy due in September.

Although it recorded 20 per cent growth in profit in the half year to the end of December, the bank still needs to reduce its cost-to-income ratio closer to CBA’s target of less than 40 per cent (Bankwest’s now stands at around 50 per cent).

But with several years of cost cutting and productivity drives already implemented, the best way to continue improve that is by finding new revenue, said CFO Jason Clifton.

“The strategy is not about how we get costs out of this place, the strategy is going to be about how we build this business," he said.

“There is not going to be a radical departure from what we have done in the past – we are going to continue to operate in our target markets around the [small and medium-sized businesses] and our customers in business. It is really around how we can do that more effectively."

As for all banks, with low-lending growth and higher costs of funding Bankwest needs to find sources of revenue outside of lending.

Mr Clifton understands this well. He said rather than targeting new sectors, it needs to get more from existing borrowers. “Our biggest opportunity is about getting a deeper relationship with our customers," he said.

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“If we have just got a mortgage customer, then we have an opportunity to look after their transactional banking; if we have lent money to a small-to-medium-size enterprise perhaps there is an opportunity to also do some hedging for them. So there are opportunities to cross sell to customers."

The question is how much demand there will be from Bankwest’s customer base for other products outside loans, said JP Morgan banking analyst Scott Manning.

At the same time, keeping a lid on funding costs compared to the growth in loans written remains important. This depends on the ability to attract customers to more sticky, less costly low-interest transaction accounts, rather than high interest savings accounts.

The big banks get about 60 per cent to 65 per cent of their revenue from the difference between their lending rates and their deposit rates – the net interest margin. The regional banks are more reliant on this traditional source of earnings. For Bankwest it is about 85 per cent of revenue.

The bank’s net interest income increased by 10 per cent in the six months to December 2011 compared to the prior corresponding period, due to strong loan growth. But non-loan income decreased by 13 per cent and net interest income growth had slowed to 1 per cent compared to the first six months of 2011.

“There is currently a fundamental disconnect [for Bankwest] between strong loan growth and weak deposit growth on the East Coast in particular," Mr Manning said.

“Bankwest would have a higher proportion of its deposits in online, high-cost deposits in the retail bank and they would also have a higher proportion of their corporate deposit book in overnight high-interest accounts."

“They do need to rectify the funding mix, which will take a bit of time," he said.

Independent banking analyst Martin North (formerly of Fujitsu), said Bankwest had reduced its deposit rates compared to some of its competitors.

“They were seen as an organisation with some of the most competitive rates in the market on deposits, but they are not seen as quite as aggressive as some of the other players now."

But he said they had done well in improving customer service compared to other banks, including bringing down call wait times.

Bankwest’s Mr Clifton said as well as reducing new branch sizes it had increased “productivity" and customer service by using branch staff to take calls instead of call centres.

“We are either putting kiosks into shopping centres as opposed to branches or redeploying phone calls and directing them into branches during people’s downtimes as opposed to getting them into the cost centres," he said.